Page 517 - SAIT Compendium 2016 Volume2

IN 58 (2) Income Tax acT: InTeRPReTaTIon noTes IN 58 (2)
6.1.2 Time of accrual of an amount in a form other than money
The timing of an accrual of an amount in a form other than money must be determined in accordance with general legal principles. In this regard, the courts have determined that an accrual can only take place when the taxpayer has become unconditionally entitled to the amount in question.*
The timing of an accrual of an amount in a form other than money must therefore be determined in each individual case having regard to the law and the facts and circumstances of each case.
The borrower in the retirement village industry is assessed on the right to use the interest-free loan in exchange for granting a right of occupation only in the year in which the borrower becomes entitled to the right to use the loan. Note: The borrower is not assessed on the right to use the same loan in subsequent years irrespective of the term of the loan.
6.2 The right to retain and use an interest-free loan in the context of a group of companies and between shareholders and their companies
The right to use an interest-free loan given by a shareholder to a company or by a company to another company in the same group of companies may be made with the intention of providing long-term working capital to the company or to meet capital expenditure requirements within the group of companies.
The shareholder or group company that grants the right to use an interest-free loan may not necessarily intend the right to be in exchange for goods sold, services rendered or some other bene t granted by the borrowing company. Interest- free loans between shareholders and their companies and between companies within the same group of companies would therefore not necessarily be affected by the Brummeria case since these interest-free loans may be granted in a capital context.
However, a borrower that has provided any goods, services or other bene ts to the lender in exchange for the use of an interest-free loan, must value the right to use that loan and include the amount in that borrower’s gross income.
Each right to the use of an interest-free loan granted in this context must therefore be considered and evaluated against the background of its own facts and circumstances and intention of the parties to the interest-free loan to determine whether the amount is of a capital nature or not and whether its value must be included in the borrower’s gross income.
6.3 Receipts or accruals in a form other than money in any other context
The value of a receipt or accrual in a form other than money would usually not have to be included in gross income if the receipt or accrual did not take place in exchange for goods supplied or services rendered. The reason for this is that such a receipt or accrual would probably be of a capital nature. However, each and every transaction will have to be evaluated on its own merits and against the background of its own facts and the intention of the parties.
7. Granting of life rights over units in a retirement village—Binding General Ruling (BGR)
The contents of this paragraph constitute a BGR under section 89 of the Tax Administration Act, 2011 and relate to the de nition of the term ‘gross income’ in section 1 (1). This BGR applies with effect from the commencement of years of assessment ending on or after 31 December 2008 and will apply for an inde nite period.
Agreements in the retirement industry are frequently structured in such a way that one person (the owner of a unit) grants a lifelong right of occupation over that unit to another person (the life-right holder). As compensation the life-right holder advances the owner an interest-free loan for the duration of the period of occupation.
Only amounts received by or accrued to a taxpayer during a particular year of assessment must be included in that taxpayer’s gross income for that year of assessment.† The value of a right that accrues to a taxpayer in a particular year of assessment must be determined in that year.‡
In calculating the monetary value of the right to use an interest-free loan in the year in which it is granted, it should be taken into account that the owner of the unit has given something in exchange to the life-right holders. The quid pro quo is the granting of the lifelong right of occupation of the unit. The owner is therefore left only with the bare dominium of the unit for the full period of the loan. Only when the loan is repaid and the life right is re-united with the bare dominium, will the owner be in a position to deal freely with the complete ownership of the unit.
The value of this quid pro quo given by the owner of the unit to the life-right holder should therefore be determined and taken into account in the valuation of the right to use the interest-free loan.
The right to use an interest-free loan granted by an occupant in a retirement village to the owner of that unit in exchange for the granting of a life right of occupation in respect of that unit usually does not relate to a xed period. Instead, the period over which the right to the use of the loan is to be enjoyed depends on the life expectancy of the life- right holder and certain other contractually agreed contingencies (such as the possibility that the life-right holder may cancel the loan before his or her death).
In view of the above, it may be accepted that the value of the right to use the interest-free loan should be calculated in the year that the loan is granted with reference to the following factors:
A = The monetary value of the right of use of the interest-free loan which must be included in gross income
B = C =
D = E =
The amount of the interest-free loan
The present value of R1 a year over the life expectancy of the life-right holder*, or in the case of more than one life-right holder, the youngest of them
The weighted-average prime overdraft rate for banks in respect of the relevant year of assessment
93,1% (The percentage to be allocated to the monetary value of the life right of a unit, as opposed to the value of the complete ownership of the unit. This average percentage has been determined actuarially and is acceptable
* In Lategan v CIR 1926 CPD 203, 2 SATC 16, CIR v People’s Stores (Walvis Bay) (Pty) Ltd 1990 (2) SA 353 (A), 52 SATC 9 and Cactus Investments (Pty) Ltd v CIR 1999 (1) SA 315 (SCA), 61 SATC 43.
† De nition of ‘gross income’ in section 1.
‡ CIR v People’s Stores (Walvis Bay) (Pty) Ltd 1990 (2) SA 353 (A), 52 SATC 9.
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